I think the people of the United States deserve to know what actually happened when Nancy Pelosi and others were briefed about the CIA’s use of torture and specifically, waterboarding.

But, the fact is, those briefing notes will be kept hidden because the chances are really good that the CIA didn’t clearly show or describe or demonstrate what was involved in any way that would’ve warned the decision-makers of its implications. They didn’t want anyone to stop them.

The difference is whether the CIA in the briefing said they were going to pour a little water over the faces of the captives to make them think the contractors would drown them.

Or, if the CIA said in the briefing that they were going to drown the captives and bring them back from it, to see if they would tell anything that was not already known.

And, whether the CIA in those briefings with Nancy Pelosi and others was conducted in such a way that they showed actual video footage which clearly indicated how the waterboarding and other practices of torture were being done.

The fact is, the CIA and every other intelligence contractor holds beliefs that lies are a tool of the trade. Giving their policies and practices a “frame of reference” that makes them look okay when they are not, is standard operating policy when it comes to decision-makers in Congress, the executive branch administrators, cabinet members, the President and especially, the American people. It has always been that way. And every other intelligence agency in the world works that way too.

The police lie to the criminal to get him or her to confess without an attorney while claiming to be the “good guys.” The CIA and other intelligence professionals lie to the “enemy,” whoever that might be today or tomorrow, and regardless of that saying on their wall, they do not operate in truth, honesty, ethics, morals, or high regard for greater principles. That is not what they’ve been hired to do.

They, [including police officers, security contractors and intelligence agents of our government,] have been hired to screw the enemy agent and pretend they are lovers to get information.

And, to set up tricks whereby information can be gained by whatever means necessary. And, to mislead, lie, steal, shoot the idiot they want to question and ask questions while applying pressure for the poor bastard or bastardess to bleed to death.

These CIA, NSA, police, and other “security” professionals don’t know why the American people or the members of Congress we’ve elected would frown upon things like that, nor why they don’t want waterboarding and other “enhanced interrogation measures” to be used, nor why these things are undesirable.

That’s why we don’t leave decisions about their actions strictly to their own best thinking. It is twisted. Their discussion of it is also twisted. They have training in making it twisted with intentional goals in mind. That is what they are good at doing because we’ve already spent a ton of money making sure they are trained to be like that.

And, when I think of what the CIA agency officials likely told anybody in Congress about what they are doing – including Nancy Pelosi – it probably went something like this –

“We are going to make them uncomfortable and inconvenience them a little but it won’t hurt them in any way. It isn’t torture – we had the lawyers check that. We might pour a little water down on them so they think we might drown them, but we will have a doctor there and a psychiatrist to make sure it won’t really hurt them. That’s okay with you all, isn’t it? We don’t foresee a problem, so there should be a lot gained and no real liability for the agency.”

I wasn’t there and don’t have the privilege of looking over the briefing notes or minutes of those meetings, but I bet the CIA wasn’t forthright about the reality of those interrogation techniques where a clear view could emerge. That is not the way they do things. It isn’t rocket science to figure out that the ability to honestly convey the truth is not one of their strong suits.

If Nancy Pelosi and others in Congress may be censured over this – then President Bush, Dick Cheney, Donald Rumsfeld and every other jackass that okay’d it needs to go before the world court and be held accountable just as we have done to every other tyrant and oppressive administration across the world.

They knew better. It isn’t possible to waterboard somebody 183 times in a month accidentally. None of them would consider it anything but torture if it were done to them.

And, it wasn’t the only way to do it, didn’t yield the degree and quantity of information they claimed and the only reason to have done it and some of the other things past a point was purely evil, sheer cruelty and sadistic psychopathic thinking.

The Republicans that are screaming for this and that against members of Congress, including Speaker Pelosi are simply trying to deflect the real targets of absolute accountability in this and in other wrongs that defied the Constitution of the United States along with the trust we placed in them.

For me, I want to believe that George Jr. didn’t do this and had a whole bunch of complete jackasses around him that were advising him badly. That is what I want to believe, but the Twin Towers came down on his watch because of the incompetence and infighting he and his cronies of the Republican party created.

And, no good bit of common sense can get through that mess of confused intellectual inbreeding they called policy in any agency they ruled. It is all – every last one of them – mucked up. Every agency, every purpose, every charter, every underlying goal and every policy twisted by their applications of it. But, they were consistent.

To find who actually was the individual or group of individuals behind these choices would be an act of God because the convoluted manner in which they governed and chose to “enact” their principles yielded the exact opposite of what they claimed to have intended – in every agency and facet of American life they touched.

There were reports that our government was broken as the news covered things last year that they found. And, they are right – it was broken and the Republicans who are now screaming against change want to keep it that way. While they are skimming around the People’s pond up there in Washington, they are failing to join with all of us in seeking solutions that will work. It is a disgusting waste of time, effort, good-will and resources.

– cricketdiane, 05-19-09

***

Nancy Pelosi and the CIA – it isn’t Leon Panetta’s game – His job sits on top of the agency known for lies, it is their stock and trade – the new Director can’t speak for them or their past actions accurately – no matter what they say at the desks of the CIA operatives and supervisors – the US Congress can’t be made into a war zone by the Republicans over this – they are the ones that are accountable for torture and other violations of the US Constitution

Leon Panetta cannot even begin to comprehend the beast that he is dealing with in the CIA. It is backwards, upside down and completely convoluted from anything that normal everyday people would consider right. That is why they can do that job. And, then we train them to be more of the same twisted thinking and actions to a greater degree of the extreme. If you don’t believe it – look into the “perception management” techniques the military and intelligence agencies are taught to use. Not for the faint of heart. – my note.

Also, stock index futures and options are known as derivative products because they derive their existence from actual market indices, but have no intrinsic characteristics of their own. In addition to that, one of the reasons some believe they lead to greater market volatility is that huge amounts of securities can be controlled by relatively small amounts of margin or option premiums. One reason derivatives are popular is that they can be transacted off-balance-sheet.

A bank may have substantial sums in off-balance sheet accounts, and the distinction between these accounts may not seem obvious. For example, when a bank has a customer who deposits $1 million in a regular bank deposit account, the bank has a $1 million liability. If the customer chooses to transfer the deposit to a money market mutual fund account sponsored by the same bank, the $1 million would not be a liability of the bank, but an amount held in trust for the client (formally as shares or units in a form of collective fund). If the funds are used to purchase stock, the stock is similarly not owned by the bank, and do not appear as an asset or liability of the bank. If the client subsequently sells the stock and deposits the proceeds in a regular bank account, these would now again appear as a liability of the bank (although the same funds held in a brokerage account may or may not be off-balance sheet). However, it’s been argued that the contrary is also feasible.

Financial instruments can be categorized by form depending on whether they are cash instruments or derivative instruments:

Cash instruments are financial instruments whose value is determined directly by markets. They can be divided into securities, which are readily transferable, and other cash instruments such as loans and deposits, where both borrower and lender have to agree on a transfer.

Alternatively, financial instruments can be categorized by “asset class” depending on whether they are equity based (reflecting ownership of the issuing entity) or debt based (reflecting a loan the investor has made to the issuing entity). If it is debt, it can be further categorised into short term (less than one year) or long term.

OTC and exchange-traded

Broadly speaking there are two distinct groups of derivative contracts, which are distinguished by the way they are traded in market:

Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as swaps, forward rate agreements, and exotic options are almost always traded in this way. The OTC derivative market is the largest market for derivatives, and is unregulated. According to the Bank for International Settlements, the total outstanding notional amount is $596 trillion (as of December 2007)[1]. Of this total notional amount, 66% are interest rate contracts, 10% are credit default swaps (CDS), 9% are foreign exchange contracts, 2% are commodity contracts, 1% are equity contracts, and 12% are other. OTC derivatives are largely subject to counterparty risk, as the validity of a contract depends on the counterparty’s solvency and ability to honor its obligations.

Exchange-traded derivatives (ETD) are those derivatives products that are traded via specialized derivatives exchanges or other exchanges. A derivatives exchange acts as an intermediary to all related transactions, and takes Initial margin from both sides of the trade to act as a guarantee. The world’s largest[2] derivatives exchanges (by number of transactions) are the Korea Exchange (which lists KOSPI Index Futures & Options), Eurex (which lists a wide range of European products such as interest rate & index products), and CME Group (made up of the 2007 merger of the Chicago Mercantile Exchange and the Chicago Board of Trade and the 2008 acquisition of the New York Mercantile Exchange). According to BIS, the combined turnover in the world’s derivatives exchanges totalled USD 344 trillion during Q4 2005. Some types of derivative instruments also may trade on traditional exchanges. For instance, hybrid instruments such as convertible bonds and/or convertible preferred may be listed on stock or bond exchanges. Also, warrants (or “rights”) may be listed on equity exchanges. Performance Rights, Cash xPRTs and various other instruments that essentially consist of a complex set of options bundled into a simple package are routinely listed on equity exchanges. Like other derivatives, these publicly traded derivatives provide investors access to risk/reward and volatility characteristics that, while related to an underlying commodity, nonetheless are distinctive.

CME Group Inc. (NASDAQ: CME) is the world’s largest futures exchange. CME Group was created July 12, 2007 from the merger between the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT). On March 17, 2008, it announced its acquisition of NYMEX Holdings, Inc., parent company of the New York Mercantile Exchange, which was formally completed on August 22, 2008.[1]

Energy derivatives that pay off according to a wide variety of indexed energy prices. Usually classified as either physical or financial, where physical means the contract includes actual delivery of the underlying energy commodity (oil, gas, power, etc.)

Some derivatives are the right to buy or sell the underlying security or commodity at some point in the future for a predetermined price. If the price of the underlying security or commodity moves into the right direction, the owner of the derivative makes money; otherwise, they lose money or the derivative becomes worthless. Depending on the terms of the contract, the potential gain or loss on a derivative can be much higher than if they had traded the underlying security or commodity directly.

***

VALUATION –

Market and arbitrage-free prices

Two common measures of value are:

Market price, i.e. the price at which traders are willing to buy or sell the contract

Criticisms

Possible large losses

The use of derivatives can result in large losses due to the use of leverage, or borrowing. Derivatives allow investors to earn large returns from small movements in the underlying asset’s price. However, investors could lose large amounts if the price of the underlying moves against them significantly. There have been several instances of massive losses in derivative markets, such as:

The need to recapitalize insurer American International Group (AIG) with $85 billion of debt provided by the US federal government[3]. An AIG subsidiary had lost more than $18 billion over the preceding three quarters on Credit Default Swaps (CDS) it had written.[4] It was reported that the recapitalization was necessary because further losses were foreseeable over the next few quarters.

The bankruptcy of Orange County, CA in 1994, the largest municipal bankruptcy in U.S. history. On December 6, 1994, Orange County declared Chapter 9 bankruptcy, from which it emerged in June 1995. The county lost about $1.6 billion through derivatives trading. Orange County was neither bankrupt nor insolvent at the time; however, because of the strategy the county employed it was unable to generate the cash flows needed to maintain services. Orange County is a good example of what happens when derivatives are used incorrectly and positions liquidated in an unplanned manner; had they not liquidated they would not have lost any money as their positions rebounded.[citation needed] Potentially problematic use of interest-rate derivatives by US municipalities has continued in recent years. See, for example:[5]

Common derivative contract types

***

Here’s an interesting perspective in light of reality that we know today –

“Remember the bankruptcy of Orange County, California, and the Barings Bank due to poor investments in financial derivatives? At that time many policymakers feared more collapsed banks, counties, and countries. Those fears proved unfounded; prudent use, not government regulation, of derivatives headed off further problems. Now, however, the Financial Accounting Standards Board, the Federal Reserve, and the Securities and Exchange Commission are debating the merits of new rules for derivatives. But before adopting regulations, policymakers need to separate myths about those financial instruments from reality.”

10 Myths About Financial Derivatives

by Thomas F. Siems

Thomas F. Siems is a senior economist and policy adviser at the Federal Reserve Bank of Dallas. The views expressed here are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of Dallas or the Federal Reserve System.

“Most financial derivatives traded today are the “plain vanilla” variety–the simplest form of a financial instrument. But variants on the basic structures have given way to more sophisticated and complex financial derivatives that are much more difficult to measure, manage, and understand. For those instruments, the measurement and control of risks can be far more complicated, creating the increased possibility of unforeseen losses.” – Thomas F. Siems

The largest appeal of derivatives is that they offer some degree of leverage. Leverage is a financial term that refers to the multiplication that happens when a small amount of money is used to control an item of much larger value. A mortgage is the most common form of leverage. For a small amount of money and taking on the obligation of a mortgage, a person gains control of a property of much larger value than the small amount of money that has exchanged hands.

Derivatives offer the same sort of leverage or multiplication as a mortgage. For a small amount of money, the investor can control a much larger value of company stock then would be possible without use of derivatives. This can work both ways, though. If the investor purchasing the derivative is correct, then more money can be made than if the investment had been made directly into the company itself. However, if the investor is wrong, the losses are multiplied instead.

Derivatives made the news in 1995 when rogue trader Nick Leeson single-handedly caused the failure of the Barings bank of England. Nick Leeson was a derivatives trader whose trades did not work out, and due to the enormous leverage of the trades used, the losses became so large that the bank was bankrupt when the results of his trades become due. Warren Buffet, a much revered and very successful investor, has stated in one of his annual reports that he is very much against the use of derivatives and he expects that they will lead to eventual failure for anyone who uses them. In spite of all this negative press, derivatives have long been a normal part of business and investing and are likely to be so for many more years.

***

Unlike Warren Buffet, Sir Julian Hodge, the Welsh banker, issued his apocalyptic warning three years before the first rash of derivatives disasters involving Metallgesellschaft, Orange County, Sears Roebuck, Proctor & Gamble, happened in 1994. More was to come in 1995 in the form of the Daiwa and Barings scandals. None of those on their own, however, threatened to bring the world financial system to its knees. Until recently the crisis that came closest to doing so involved LTCM in September 1998. Nearly 10 years later, in March 2008, the FED took emergency action to avoid what was called derivatives Chernobyl. That action seems to have worked … so far, but could a mega-catastrophe lie around the corner …?

Derivatives and Speculation

The job of a derivatives trader is like that of a bookie once removed, taking bets on people making bets.

The description above comes from In Into the Fire a novel about fraudulent trading in derivatives (now out in a new edition), by Linda Davies. Why on earth should anyone want to be a bookie once removed? The answer was given 63 years earlier by John Maynard Keynes in his best-known work.

Keynes on Speculation

“Professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not the faces which he himself finds the prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view.”

“It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree when we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees.”

Keynes, John Maynard The general theory of employment, interest and money. London : Macmillan, St. Martin’s Press, 1936. page 156.

Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Because derivatives are just contracts, just about anything can be used as an underlying asset. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region.

Derivatives are generally used to hedge risk, but can also be used for speculative purposes. For example, a European investor purchasing shares of an American company off of an American exchange (using American dollars to do so) would be exposed to exchange-rate risk while holding that stock. To hedge this risk, the investor could purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into euros.

Even in our advanced, technology-based society, we still live largely at the mercy of the weather. It influences our daily lives and choices, and has an enormous impact on corporate revenues and earnings. Until recently, there were very few financial tools offering companies’ protection against weather-related risks. However, the inception of the weather derivative – by making weather a tradeable commodity – has changed all this. Here we look at how the weather derivative was created, how it differs from insurance and how it works as a financial instrument.

Until recently, insurance has been the main tool used by companies’ for protection against unexpected weather conditions. But insurance provides protection only against catastrophic damage. Insurance does nothing to protect against the reduced demand that businesses experience as a result of weather that is warmer or colder than expected.

In the late 1990s, people began to realize that if they quantified and indexed weather in terms of monthly or seasonal average temperatures, and attached a dollar amount to each index value, they could in a sense “package” and trade weather. In fact, this sort of trading would be comparable to trading the varying values of stock indices, currencies, interest rates and agricultural commodities. The concept of weather as a tradeable commodity, therefore, began to take shape.

[ . . . ]

In 1997 the first over-the-counter (OTC) weather derivative trade took place, and the field of weather risk management was born. According to Valerie Cooper, former executive director of the Weather Risk Management Association, an $8 billion weather-derivatives industry developed within a few years of its inception.

CME Weather Futures and Options on Futures

In 1999, the Chicago Mercantile Exchange (CME) took weather derivatives a step further and introduced exchange-traded weather futures and options on futures – the first products of their kind. OTC weather derivatives are privately negotiated, individualized agreements made between two parties. But CME weather futures and options on futures are standardized contracts traded publicly on the open market in an electronic auction-like environment, with continuous negotiation of prices and complete price transparency.Broadly speaking, CME weather futures and options on futures are exchange-traded derivatives that – by means of specific indexes – reflect monthly and seasonal average temperatures of 15 U.S. and five European cities. These derivatives are legally binding agreements made between two parties, and settled in cash. Each contract is based on the final monthly or seasonal index value that is determined by Earth Satellite (EarthSat) Corp, an international firm that specializes in geographic information technologies. Other European weather firms determine values for the European contracts. EarthSat works with temperature data provided by the National Climate Data Center (NCDC), and the data it provides is used widely throughout the over-the-counter weather derivatives industry as well as by CME.

In finance, a credit derivative is a derivative whose value derives from the credit risk on an underlying bond, loan or other financial asset. In this way, the credit risk is on an entity other than the counterparties to the transaction itself.[1] This entity is known as the reference entity and may be a corporate, a sovereign or any other form of legal entity which has incurred debt.[2] Credit derivatives are bilateral contracts between a buyer and seller under which the seller sells protection against the credit risk of the reference entity.[3]

The parties will select which credit events apply to a transaction and these usually consist of one or more of the following:

failure to pay (the risk that the reference entity will default on one of its obligations such as a bond or loan)

obligation default (the risk that the reference entity will default on any of its obligations)

obligation acceleration (the risk that an obligation of the reference entity will be accelerated e.g. a bond will be declared immediately due and payable following a default)

repudiation/moratorium (the risk that the reference entity or a government will declare a moratorium over the reference entity’s obligations)

restructuring (the risk that obligations of the reference entity will be restructured).

Where credit protection is bought and sold between bilateral counterparties this is known as an unfunded credit derivative. If the credit derivative is entered into by a financial institution or a special purpose vehicle (SPV) and payments under the credit derivative are funded using securitization techniques, such that a debt obligation is issued by the financial institution or SPV to support these obligations, this is known as a funded credit derivative.

This synthetic securitization process has become increasingly popular over the last decade, with the simple versions of these structures being known as synthetic CDOs; credit linked notes; single tranche CDOs, to name a few. In funded credit derivatives, transactions are often rated by rating agencies, which allows investors to take different slices of credit risk according to their risk appetite.

The ISDA[5] reported in April 2007 that total notional amount on outstanding credit derivatives was $35.1 trillion with a gross market value of $948 billion (ISDA’s Website). As reported in Times Sept. 15.08 “Worldwide credit derivatives market is valued at $62 trillion”. [6]

Although the credit derivatives market is a global one, London has a market share of about 40%, with the rest of Europe having about 10%.[4]

The main market participants are banks, hedge funds, insurance companies, pension funds, and other corporates.[4]

Proposals for a makeover of the financial system include reform of the credit derivatives market, which offers over $50 trillion of default insurance coverage. Do investors need that much insurance, or is this mainly a dangerous casino operating under the radar of regulators — until a major financial institution like AIG needs a bailout? What sort of reform is needed?

The seller of protection in a credit derivatives contract receives premiums from the buyer of protection until maturity, or until default of the named borrower. Contracts are negotiated over the counter, not on an exchange, so it is difficult to know how much insurance exists on each borrower, or to know who has insured whom, and for how much.

That privacy is not unusual in the normal course of business contracts. What is unusual is the size of the potential claims. There is a public interest in knowing that systemically important sellers of protection have not overdone it. If a large bank or insurance company does not have enough capital to cover settlement claims, then its failure, or the threat of it, can cause mayhem, as we have just seen.

Derivatives and Mass Financial Destruction

Complex financial products can be useful if regulated properly.

The Fed is pressing dealers to quickly establish clearing in credit derivatives. The dealers have expressed an interest in using their own clearing counterparty, the Chicago Clearing Corporation. Alternatively, they could clear credit derivatives with a new joint venture of the Chicago Mercantile Exchange and Citadel (a large hedge fund). Either way, regulators should ensure that a clearing counterparty is extremely well capitalized and has strong operational controls.

Unfortunately, the urgency to set up clearing for credit derivatives may lead us to miss the opportunity to reduce exposures even further by clearing credit derivatives along with other forms of over-the-counter derivatives, such as interest-rate swaps and equity derivatives, which represent similarly large amounts of risk transfer.

Mr. Duffie is a professor of finance at Stanford University’s Graduate School of Business.

A credit derivative is an OTCderivative designed to transfer credit risk from one party to another. By synthetically creating or eliminating credit exposures, they allow institutions to more effectively manage credit risks. Credit derivatives take many forms. Three basic structures include:

credit default swap: Two parties enter into an agreement whereby one party pays the other a fixed periodic coupon for the specified life of the agreement. The other party makes no payments unless a specified credit event occurs. Credit events are typically defined to include a material default, bankruptcy or debt restructuring for a specified reference asset. If such a credit event occurs, the party makes a payment to the first party, and the swap then terminates. The size of the payment is usually linked to the decline in the reference asset’s market value following the credit event.

File Format: PDF/Adobe Acrobat – View as HTML
This document will attempt to describe how simple credit derivatives can be. formally represented, shown to be replicable and ultimately priced, using rea- …http://www.probability.net/credit.pdf –

(from Google)

***

When Delphi filed for bankruptcy October 8, investors had to start assessing their losses on more than $2 billion in the auto parts maker’s bonds, which have recently traded at around 60% of their face value. As bad as that is, there is more. Looming over the market like an invisible and unpredictable giant is an estimated $25 billion in credit derivatives, a form of insurance whose value is directly linked to the ups and downs of Delphi debt.

What happens to these complex contracts as the underlying bonds plunge in value? Will ripple effects amplify the Delphi damage, spreading harm to institutional and individual investors who otherwise have no stake in Delphi?

The Delphi situation points to a broader question: Is the credit derivative market, which grew from next to nothing in the mid-1990s to an estimated $5 trillion at the end of 2004 — and is perhaps more than twice that size today — pumping new, poorly-understood risk into the financial markets? Or are these exotic products helping to mitigate the shock from corporate crises, as their proponents claim?

The Ballooning Credit Derivatives Market: Easing Risk or Making It Worse?

Pressure to regulate the $62,000bn credit derivatives market mounted on Tuesday as the main US market regulator called on Congress to pass laws to supervise the industry.

Christopher Cox, chairman of the Securities and Exchange Commission, told the Senate banking committee that “significant opportunities” for manipulation existed in the market for credit default swaps, which offers a kind of insurance against companies defaulting on their debt.